According to statistics by digital business analytics company comScore, Americans spent a whopping $37.2 billion buying online this holiday season. Surprisingly, no state or local sales taxes were paid on the majority of those purchases. That’s because, until now, online retailers with no physical presence in a particular state were exempt from paying taxes on online retail sales. That looks like it’s about to change. In November 2011, a bipartisan group of Republican and Democratic Senators introduced the Marketplace Fairness Act, a bill that would authorize the 45 states with sales taxes to require Internet merchants selling to customers in the U.S. to collect online retail sales taxes.

Two important elements of the proposed legislation would be that: 1) online retailers doing less than $500,000 a year in sales will be exempt from collecting the tax; and 2) the states will be required to simplify their present sales tax systems, which are all different and unique from one another. (Janet Novack, The Last Tax Free Cyber Monday, Forbes, Nov. 23, 2011).

If this legislation goes through (there have been many attempts over the past several years to have online retailers collect this sales tax) online retailers might wonder, “For whom will the Marketplace Fairness Act be fair?” -- and prepare themselves for the following aftershocks:

#1. Tax tracking systems will be expensive and complicated

The typical online retailer does not have the resources or the staff capabilities to implement any such new law – particularly since it involves 45 different states, with 45 different sets of sales tax laws. The cost to each online retailer of implementing the new law will likely require new hardware and software; consultants to help figure out and assure compliance with the law; and other education, tracking and reporting activities.

#2. The exemption guidelines could be altered once they’re in place

Once the government puts the framework in place to properly collect out-of-state tax from Internet retailers, there is a very real danger that the states could reduce or remove any dollar-amount exemptions put into the original program. (PC World Angela West, Why you should care about an Internet sales tax).

#3. Internet business development will be dampened

Removing another important cost advantage for online retailers might affect those going into, or staying in business, said comScore analyst Andrew Lipsman, noting that online retailers still have an advantage -- "less overhead than brick-and-mortar -- so they can still maintain better competitive prices even with sales tax factored in.”

#4. Consumers may turn off to online shopping

Online shopping without paying sales tax has been very appealing to consumers. Without that extra “savings,” will consumers seek other ways to save on their purchases?

#5. Competitive pricing strategies will come into play

If sales taxes must be added and collected by online retailers, it will affect pricing. If it affects pricing, online retailers must watch pricing more carefully than ever. In order to watch pricing more carefully than ever, online retailers must acquire, sharpen, and wisely-use pricing intelligence tools.

Who’s For and Who’s Against?

Upholding its system of serving small online retailers, eBay does not want to collect sales tax for online sales. Nor do social media leaders like Facebook and Yahoo. “This is another Internet sales tax bill that fails to protect small-business retailers using the Internet and will unbalance the playing field between giant retailers and small-business competitors,” said eBay’s vice president for government relations, Todd Cohen, quoted in a variety of media. Moreover, Mr. Cohen said, “It does not make sense to expand Internet sales tax burdens on small businesses at a time when we want entrepreneurs to create jobs and economic activity.”

The original “darling” of Internet retailing, Amazon.com, fought making sales tax payments for years, but finally, under duress, agreed to collect sales taxes from California residents as of September 2012. The chastened Amazon, which also had sales tax collection issues in other states, has now become a strong proponent of the legislation, while simultaneously offering to make its sales-tax-collection technology available as a service to help (its) sellers.

Others obviously wanting the sales tax implemented include retail industry giants Walmart, Best Buy, Target, J.C. Penney, and Home Depot, through their Retail Industry Leaders Association; CEA, the Consumer Electronics Association, which has done a turnabout and now also backs the sales tax collection; and just about every brick-and-mortar retailer in existence.

If there’s any good news, it is that, despite the huge financial incentive for all the states, it may take years before most of them can manage to implement the legislative and administrative changes needed to enforce the legislation.

Conclusion:

If an online retail sales tax comes into being, online retailers will have to sharpen their competitive pricing tools, stay aware of their competitors' pricing, and continue to develop winning strategies to make wiser- and more-competitive-than-ever pricing decisions. In the meantime, online retailers might wish to add their voices and opinions to the discussion, to prevent, alter, or slow the initiation of legislation like the “Marketplace Fairness Act.”

What do you think? Let me have your thoughts below. Thanks. Gilon

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About Author

Gilon is a seasoned marketing, sales and business development executive with over 15 years of experience in the software and Internet business. He is the Founder and CEO of GuruShots. Previously, Gilon was the CMO of Upstream Commerce, VP of Marketing at iMDsoft and Director of Global Marketing at SAP. He earned an MBA at the MIT Sloan School of Management and a BS in Electrical Engineering from Tufts University.

2 Responses

Excellent article. Very well written. I love the details on who likes and who doesn’t.
Not sure about the pricing point though. It seems to me that companies are always motivated to price properly because it always maximizes profits. However, you could make the argument that if the choice is pricing properly or going out of business, that may be enough motivation to improve pricing.

This is a very thought provoking article particularly given the increasing amounts of web-based purchasing happening in households today. With taxes on Internet purchases almost certainly coming in those states that charge sales taxes I did want to briefly touch on the five potential ramifications individually.

1. No doubt it will be complicated and time consuming for online business to keep up to date with so many different tax codes. However, one of the great strengths of our economic system is the part that innovation plays in it. I fully expect some new entrepreneur to devise a program/business to make is easier for small online businesses to keep up to date on various tax codes, if this has not already been done.

2. This is almost certain to occur on a regular basis given the number of tax codes and locations involved. I refer to my previous comments about innovation to handle this issue.

3. I would not expect any business development to be curtailed at all. Given the exploding nature of online purchasing, I believe the opposite will occur with even greater development and ideas coming from the online sector.

4. Again, very unlikely to happen. As online businesses lose their tax “savings”I do think marketing strategies in this sector may have to be altered. For example, putting a greater emphasis on convenience to the customer instead of price. I am of the opinion that convenience is what drives more online purchases above anything else in a customers eyes as it stands now. Rising gas prices could also play into the online retailers hands as that increased cost would be factored in to the total cost of a trip to a brick and mortar store.

5. I would hope that competitive pricing would always be at the forefront in the minds of smaller online businesses, although I do not believe this to be true. I think the sharp change in pricing that would occur due to online taxation would then force online businesses to adapt to new marketplace realities and seek innovation in how they would handle competitive information, be it pricing, marketing, or another discipline.

Again, very well thought out points that were mentioned here. I look forward to seeing how online businesses react to the future pricing that is certain to come.